2012 Crop Insurance Decisions · Sept ‘13 CBOT 8/15 to 9/14 Sept. ‘13 Rev. Prot. Price...

2013 Crop Insurance Decisions

March 4, 2013

Roger Betz

Senior District Extension Farm Management Agent

1. Crop Insurance Basics Review

2. Corn & Soybean Price Outlook

3. Re-Evaluate ACRE

4. Review Past Insurance and ACRE Prices

5. Review Trend-Adjusted Actual Production History (TA-APH) Yield Endorsement

6. Crop decision point summary

Todays Topics

Life Insurance

How many of you have life insurance?

Do you hope to collect on your insurance this year?

Health Insurance

Do you have the best insurance money can buy?

What if the government paid part of the premium?

Crop Insurance

Crop insurance is like health insurance for your crops.

The better the policy coverage, the lower the deductible, the higher the premium.

Unlike health insurance, the government pays a portion of your crop insurance premium.

Crop Insurance Subsidies

Structure for Corn, Soybeans, and Wheat Policies for Individual Coverage

• Yield option (general design goes back to the mid-80’s)

• Pure revenue insurance option (adaptation of the original RA policy)

• Revenue with harvest price option (adaptation of the original CRC policy)

Structure for Corn, Soybeans, and Wheat Policies for Area Coverage

Trigger is on county values, not farm values

Do not transfer comparable risk to an individual policy unless farm yield and revenue is highly correlated with farm yield and revenue.

Requires organizing farm data against county data to check relationship.

Structure for Corn, Soybeans, and Wheat Policies for Area Coverage

Rule of thumb has been correlation needs to be 0.85 to be worth considering.

Risk transfer only works well for farms which are widely scattered across a county so their yield matches county yield and where they have many fields for which they do not have records to support accurate APH yields.

Federal Crop Insurance Individual Producer Coverage

CAT: Catastrophic Risk Protection • Lowest level of MPCI.

• Enterprise unit.

• Covers 50% of the crop yield only.

• Losses are indemnified @ 55% of indemnity price.

• Cost is a per crop administrative fee.

YP : Yield Protection • Offers higher level of insurance coverage than

• Coverage choices include 50 to 85% of yield in five percent increments.

• Covers losses of crop yield only.

RP : Revenue Protection • Includes the same levels of coverage choices as

YP (Yield Protection).

• However, RP insures against losses of revenue caused by both yield loss and/or price changes.

REVENUE = Yield X Price

150 bu Yield X $6.00 Price = $900.00 Revenue

Revenue Protection addresses both Yield and Price

Federal Crop Insurance County Level Coverage

GRP: Group Risk Plan

• Insures against county level yield losses only.

• Based on an index of expected county yields for a given crop.

• Offers no farm level yield coverage.

GRIP:Group Risk Income Protection • Insures against losses of revenue at the county level.

• Adds a price component to GRP.

• GRIP compared to GRP is like comparing RP (Revenue Protection) to YP (Yield Protection) Offers no farm level yield coverage.

Basic = all land owned or share leased from a landowner

Optional = crop within each section divides into smaller units

Enterprise = all of a crop within the county cheaper than optional, less variability

Insurance units:

Protects against losses to crop yield only

Based on actual production history (APH) or County T Yield

Replant & prevented planting coverage included

Coverage based on “Market Price Election,” APH, and percent coverage selected

Premium payments subsidized

YP (Yield Protection)

Market Price (MP) Elections 2012 2013

Corn $5.68 $5.65

Soybeans $12.55 $12.87

Wheat $8.20 $8.57

YP (Yield Protection)

Coverage calculation

• APH Yield x Coverage % = Guaranteed Bushels

• Guaranteed Bushels x Futures Market Price Election =

Coverage Level in $/Acre

Losses are indemnified at Market price election

Protects against revenue loss due to yield loss and/or price changes.

Converts your bushel guarantee into a dollar guarantee per acre.

Same as YP

• Uses APH or County T Yields (60%)

• Coverage choices range from 50 to 85%

• Premium subsidized, based on coverage

• Replant & prevented planting included

RP (Revenue Protection)

Offers 3-way protection

• Coverage if yields are low

• Coverage if prices fall

• Coverage if a short crop and prices rise

RP (Revenue Protection) -continued-

Crop Contract Base Price Harvest Price

Corn - Mich Dec CBOT February November

Soybean Nov CBOT February October

Winter Wheat Sept CBOT 8/15 to 9/14 Sept. ‘13

Rev. Prot. Price Guarantees

2013 Corn

Wheat 2013

Corn-MI Dec CBOT February November

Winter Wheat

Sept ‘13 CBOT 8/15 to 9/14 Sept. ‘13

Base Price Announced early March or Sept. for wheat. Used to calculate the minimum revenue guarantee.

APH x % Coverage x Base Price

Corn Dec CBOT February November

Winter Wheat

Sept ‘13 CBOT 8/15 to 9/14 Sept. ‘13

Harvest Price Announced early Nov/Dec. If higher than base price, used to calculate a new higher revenue guarantee.

The maximum Harvest Price is limited two times the Base Price.

• Example, base price $6.00

• Harvest price max is $12.00

No limit on the minimum price

The Harvest Futures Price is used to value your production

If the Harvest Price is lower than the initial Base Price, it’s as though the amount of bushels covered by insurance increases.

R.P. Indemnity (Loss) Payments

If the Harvest Price is higher than the initial Base Price, the revenue guarantee increases -- but so does the value of your harvested production

This is the feature in RP that protects you if you have pre-harvest marketed grain (forward contract before harvest)

RP Indemnity (Loss) Payments

Crop Insurance Comparison Same Price 2013 Yield

Protection 2013 Revenue

Protection

APH 40 bu/A 40 bu/A

Protection

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Crop Insurance Comparison Same Price Y P R P

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Base Prices for 2013

YP $12.87

RP $12.87

Crop Insurance Comparison Same Price Y Protection R Protection

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Guarantee 30 bu/A $386.10/A

Crop Insurance Comparison Same Price Yield Prot. Revenue Prot.

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Minimum Revenue Guarantee

APH x % coverage x Base Price

40 bu x 75% x $12.87 = $386.10

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Harvest Yield 22 bu/A 22 bu/A

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Harvest Price $12.87

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

New Guarantee -------

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Indemnity $102.96/A $102.96/A

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Indemnity $102.96/A $102.96/A

Indemnity

Guarantee – Actual Production x Harvest Price

$386.10 – (22 bu x $12.87)

$386.10 – $283.14 = $102.96

Crop Insurance Comparison Price Decrease Yield Prot. Revenue Prot.

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Harvest Price

New Guarantee

Indemnity $102.96

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Indemnity $102.96/A $166.10

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Indemnity $102.96/A $166.10

Indemnity

$386.10 – (22 bu x $11.00)

$386.10 – $220.00 = $166.10

Crop Insurance Comparison Price Increase Yield Prot. Revenue Prot.

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Harvest Price

Indemnity $102.96/A

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

New Guarantee

Indemnity $102.96/A

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

New Guarantee $420.00

Indemnity $102.96/A

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Indemnity $102.96/A

Final Guarantee

With a higher harvest price, a new Guarantee is calculated.

APH x % cover x Harvest Price

40 bu x 75% x $14.00 = $420.0

APH 40 bu/A 40 bu/A

Coverage 75% 75%

Base Price ‘13 $12.87 $12.87

Indemnity $102.96/A $112.00

Indemnity

$420.00 – (22 bu x $14.00)

$420.00 – $308.00 = $112.00

Market Year Average Price

RP - Revenue-Based Insurance Advantages

May have larger indemnities than yield-based crop insurance

3-way coverage means a greater chance of indemnity payment

Is competitively priced with yield-based crop insurance. Premium adjusted for additional price risk contribution to revenue risk.

Can use it as an integral part of your marketing strategy!

Fact or Fiction # 1

FICTION • YP and RP automatically include prevented

planting coverage at 60% of your coverage level. For example, at the 75% level, you have 45% coverage if you don’t get the crop planted

• What are the odds that you won’t get some of the crop planted?

“It’s February – I don’t dare forward price 40% of next fall’s crop now – I might not get it planted!”

Fact or Fiction # 2

FICTION, Yes You Can • In 2008, the base price in February was

$5.40. The harvest price was $3.74.

• Your minimum revenue guarantee was $608 (150 bpa x 75% X $5.40). Your harvest of 155 bpa x $3.74 is only $580. You have a $28 indemnity coming.

“My APH is 150, I have 75% Rev. Prot., and I just harvested 155 bushels per acre. I can’t have a crop insurance loss.”

Fact or Fiction # 3

FACT?? • RP has the feature that increases the revenue

guarantee if the harvest price is higher than the spring base price. In most cases, you pay for this feature.

• The intent of these tools was to allow you to pre-harvest market your grain. (up to coverage level)

“My spouse went to a meeting & tells me I am wasting my money if I buy Rev. Prot. and don’t have a plan to pre-harvest market my grain.”

Fact or Fiction # 4

FICTION, You Are Covered • The final revenue guarantee with RP is re-calculated

using the harvest price if it is higher than the base price. The insurance increase will offset the cost of buying the higher priced grain to fill your contracts.

• Let’s look at an example

“I have RP & forward priced 75% of my APH on 600 ac soybeans. Yields are bad, prices have skyrocketed, I can’t deliver on my contracts – I am going to lose my shirt”

600 acres of soybeans

40 bu/acre APH

75% coverage revenue-based insurance

600 x 40 x 75% = 18,000 bushels -- insured amount to pre-harvest market

You get it sold and August turns dry

I can’t deliver, I’m going to lose… Fiction!

Marketed 18,000 bu pre-harvest (75% of APH) at $11.50 = $207,000

Only produced 13,200 bu. Buy back 4,800 bu. at $14.90 - $71,520 • (price includes extra $.10 for purchase) $14.80 local cash price

Crop insurance indemnity + $72,000 Based off of Futures at $15.00

Gross Return = $207,480

• There is basis opportunity/risk

Optional Unit YP RP RPwHPE

Premium per acre $9.52 $13.43 $11.05

Optional Units 600Ac YP RP RPwHPE

Premium per acre $9.52 $13.43 $11.05

18,000 bu at $11.50 $207,000 $207,000 $207,000

Repurchase beans (-) - $71,250 - $71,250 - $71,250

Total Indemnity (+) +$61,776 + $72,000 +$15,660

Total premium (-) - $5,712 - $8,058 - $6,630

Net result $191,814 $199,692 $144,780

Optional Units 600Ac YP RP RPwHPE

Premium per acre $9.52 $13.43 $11.05

18,000 bu at $11.50 $207,000 $207,000 $207,000

Repurchase beans (-) - $71,250 - $71,250 - $71,250

Total Indemnity (+) +$61,776 + $72,000 +$15,660

Total premium (-) - $5,712 - $8,058 - $6,630

Net result $191,814 $199,692 $144,780

RP with the Harvest Price Exclusion is a bad choice if you plan to pre-harvest market grain. The spring minimum guarantee is also the final guarantee – but it uses the harvest price to value production.

Fact or Fiction # 5

FACT & FICTION • YP & RP will cover losses from soybean

diseases if you use good agronomic practices. If you scout & treat the field if needed – you are covered!

“There is a possibility I could get soybean rust in my fields this summer. I don’t need to worry -- my crop insurance will cover the loss.”

The Facts of Revenue-Based Crop Insurance

Covered

Low Price High Price

Covered

Covered Covered

Covered Tax Problem!

Covered Covered

2013 Crop Insurance Purchase Decision:

Trend Yield Adjustment Option

March 4, 2013

Roger Betz

Senior District Extension Farm Management Agent

Michigan Corn Yields

Yields increase 1.5 to 2 bu./yr

10-year average of actual yield underestimates next year’s corn yield by about 9 bushels

% coverage level is over stated

Trend Adjusted Yield TA

TA Yield Determination

Year Actual Yield Yield Adjustment

TA Yield

2005 144 2 X 7 = 14 158

2006 158 2 X 6 = 12 170

2007 168 2 X 5 = 10 178

2008 183 2 X 4 = 8 191

2009 164 2 X 3 = 6 170

2010 194 2 X 2 = 4 198

2011 183 2 X 1 = 2 185

Average 170.0 178.0

Increase in APH

8 bu. or 4.7%

Trend Rates 2012 - Corn

0 to 1.001.00 to 1.501.50 to 1.751.75 to 2.002.00 to 2.252.25 to 2.50

Trend Rates 2012 - Soybeans

0 to 0.10.1 to 0.20.2 to 0.30.3 to 0.40.4 to 0.50.5 to 0.6

2012 Corn Trend Yield Adjustment (TA)

Allegan 1.81 Jackson 1.78

Barry 1.76 Kalamazoo 1.86

Berrien 1.9 Kent 1.64

Branch 1.77 Lenawee 1.72

Calhoun 1.79 Livingston 1.81

Cass 1.91 Monroe 1.76

Clinton 1.8 Ottawa 1.58

Eaton 1.87 Saginaw 1.86

Gratiot 1.87 St Joeseph 1.82

Hillsdale 1.72 Sanilac 1.81

Huron 1.8 Shiawassee 1.85

Ingham 1.85 Tuscola 1.82

Ionia 1.83 Van Buren 1.89

Washtenaw 1.77

Many individuals take

1. Revenue Protection (RP) COMBO

2. 75 to 85% coverage level

3. Enterprise units

4. Add TA-APH yield endorsement

5. GRIP (90% coverage level, lower protection level to adjust payment)

Strategies:

What Questions Do You Have?

Email: betz@msu.edu

Roger Betz Sr. Dist. Extension Farm Management 315 West Green Street Marshall MI 49068 Fax 269 781 0768

Program Support: Janice Wright (269) 781-0780

MSU Farm Management and Outlook WWW site (new) http://firm.msue.msu.edu

U of Illinois On-Line Calculator

U of Illinos Spreadsheet

Facilitates more detail than the online version.

U of Illinois Crop Insurance Calculator: http://www.farmdoc.illinois.edu/cropins/index.asp

2012 Crop Insurance Decisions · Sept ‘13 CBOT 8/15 to 9/14 Sept. ‘13 Rev. Prot. Price...

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